Excerpt from the Journal of Advanced Appraisal Studies - 2010

Felicia Rossomando wrote an excellent Master's Thesis at the Sotheby's Institute on blockage discounts.  One of her instructors and counselors, Tom McNulty (a contributor to the 2008 Journal) thought it would be an excellent contribution to the 2010 edition of the Journal of Advanced Appraisal Studies.  Felicia had to reduce the scope a bit to meet the editorial guidelines, but she writes a great article on blockage discounts and also provides the reader with her own insights and ideas in dealing with artist estates and large quantities of art.

In my opinion, the article, entitled The Application of Blockage Discounts For an Artist's Estate: An Art Business Approach. is one of the best articles available to the personal property appraiser about blockage discounts. If you ever need to produce an appraisal that includes a blockage discount, you need to read and consider the content of this article. You can order the Journal or get more information at www.appraisaljournal.org. The appraisal library is not complete without it.

Rossomando writes

An artist’s primary asset at death is the artwork he or she leaves behind. This valuable asset, like other property, is subject to a mandatory evaluation for estate tax liabilities. Upon the artist’s death, the executor of the estate must file a federal estate tax return, complete with a thorough appraisal of remaining property, at its individual retail value. Unlike standard property valuation, however, the designated retail value of an individual work of art can be compromised by the simultaneous presence of many similar items–ie., many unsold works of art produced by the same artist. Essentially, if the estate attempts to sell all of the artist’s remaining work in a short interim, the large quantity would saturate the market, prompting a drastic imbalance in the supply and demand levels. To remedy this problem, appraisers have adopted a business valuation principle referred to as a blockage discount. In theory, a blockage discount protects an estate from unreasonable taxation on property that holds little value in great numbers.

Originally employed in business, the term blockage refers to a business valuation policy designed to rectify a realized price reduction when a substantial block of stock by a single company, which exceeds normal trading volume, enters the market all at once. Blockage is frequently recommended for estate tax returns that involve a block of like-kind securities that remain in the portfolio of the decedent’s estate. Blockage is a widely recognized and accepted practice by the United States Department of Justice. As a result of its successful application for blocks of stock, the Department of Justice, for the past thirty years, has authorized the use of blockage for artists holding a substantial number of unsold works of art in their estate at the time of their death. However, translating the traditional practice of blockage to works of art––distinctive, one-of-a-kind objects––presents an array of unique challenges.

Intent

This paper is broken down into three parts. First, it will deconstruct the concept of blockage from its origins in business valuation. Second, it will explore the early misapplication and misunderstanding of blockage in art valuation cases for artists’ estates. By exhibiting the complexities of blockage practice and theory, the third portion of this paper will propose a two-prong recommendation that can be implemented by practitioners both within the field of appraisal and more broadly, the art business industry.

This is the third excerpt I have posted from the Journal. The journal is an excellent tool for the appraiser, and the 2010 edition contains 18 articles of appraisal related content.  Order your copy today at www.appraisaljournal.org